Archive for October, 2008

Annual reports are evolving – but not extinct – as a primary tool for telling a company’s story, according to a survey released this week by the National Investor Relations Institute (NIRI). Of the 182 companies responding, 91% produce annual reports, although the clear trend compared to past years is toward spending less on printed copies and more for online versions.

My comments on a few top-line results from those who do annuals:

… The 10-K wrap is most popular (53%), followed by traditional (35%) and summary (12%) reports. When you ask professional investors about the annual, they always claim to head straight for the MD&A and other meaty sections of the 10-K. The wrap adds the personal touch of a CEO letter or narrative, and perhaps visual elements, to drive home the key messages.

… Print budgets for annual reports are coming down. The number of copies is dropping as companies use the Notice and Access process to reduce the number of mailed books (35% now print less than 10,000). The shift toward 10-K wraps and summary reports also is cutting print costs.

… Online annual report budgets are rising, though some designers include digital versions in the print bid. Just posting a plain PDF to the website isn’t keeping up with the way people like to read online. If you haven’t already done so, you should look into offering user-friendly features like an interactive HTML-based report, hyperlinks, an online index or financial tables downloadable into spreadsheets.

… On average, companies start the annual report process 3-1/2 months before year end. So if you’re on a calendar year, you should be more than a month into planning, creating messages and developing designs.

NIRI’s survey is a good resource for benchmarking your annual report practices, including a reality check on budgets. If you’re a NIRI member, access the “Executive Alert” from the NIRI home page or the full survey report here. If you’re not a NIRI member, sign up now – or you can buy the “Executive Alert” here.

If you’re doing investor relations for a Wall Street firm, oil company or some other used-to-be-obscenely-profitable-but-now-seeking-a-bailout enterprise, your CEO may be called before a congressional committee.

Citing the performance by Lehman Brothers CEO Dick Fuld earlier this month, who “did a particularly good job of playing the baddie,” PR professional Paul Pendergrass suggests six traps to be avoided in the congressional hearing room. For example:

Say one thing; ooze another. Hire seasoned corporate speechwriters to articulate the appropriate personal feelings. Stare down into the page, and read your opening statement as if you’ve having to translate it from the original high German.

Maybe it’s not fair to pick on Fuld. Few corporate leaders survive with either their dignity or their reputation intact after being dragged into an Inquisition. One more trap is confirming you’re out of touch by “trying to prove what a regular guy you are”:

Tell stories that are meant to demonstrate your personal hardship, bootstrapping or connection with Main Street, but that instead reveal that you no longer have hundreds of millions, but only dozens of millions.

CEOs can’t win this game, obviously. When the subpoena arrives, it’s too late. Rather than wait for such a disaster, corporate staffers should try – now – to stop the managerial behavior and/or financial slide that could land the company in the headlines. And good luck.

No, no, I am not making a stock market prediction. 36,000 seems less likely to me than 3,600 – and both seem so far out on the tail of a probability curve that I’m not losing any sleep. Rather, it occurs to me that someone out there, right now, is working on a book like Dow 36,000 for the investors of 2009.

In case you missed the original back in 1999 (and copies are hard to find today), a couple of guys ran some analysis on the market of the Nineties and concluded that risk wasn’t what it was cracked up to be. The authors said investors in the dot-com “bubble” weren’t irrationally exuberant, because equities were grossly under-valued:

Stocks are now, we believe, in the midst of a one-time-only rise to much higher ground – to the neighborhood of 36,000 for the Dow Jones Industrial Average. After they complete this historic ascent, owning them will still be profitable but the returns will decline.

Euphoria kinda takes your breath away, eh? Well … My point is that the market does experience mood swings. In the current dreary stage, people are wondering if we’ve hit bottom in 2008, or how long the carnage will continue. Warren Buffett says it’s time to buy, though it’s hard to know whether he is being real or statesman-like. Bulls and bears are vocal now. And probably the stock market’s obituary will be written a few more times.

But I do imagine we’ll see, in three or six or 12 months, a return to optimism. Perhaps new cheerleaders will publish Dow 36,000-type articles and books. Assuming the recession of 2008-09 doesn’t turn into Great Depression II, the market’s mood will change. Fear will yield to greed. Memories will start to fade. A new bubble may test its buoyancy, not that bubbles are healthy. Eventually people will believe it’s different this time.

My real point is that investor relations professionals need to be thinking through the cycle – for the market, our industries and our companies. Where are we today in valuation – and how will that change as the cycle progresses? Who are the likely buyers of our securities in this phase – and the next? What’s realistic? What are the risks? What are our messages – for uncertain times, for a recession, for the recovery that lies beyond?

In our IR tactics, we need to avoid getting ahead of the market, but we do need to be thinking ahead.

(For the record, a bit over Dow 14,000 was the peak – in October 2007. Maybe next year’s book could just chart a path back to Dow 10,000?)

Initial public offerings, of course, aren’t exactly catching fire in 2008. Nearly twice as many IPOs have been withdrawn or postponed year-to-date (80) as have been completed (just 43 globally), according to Renaissance Capital‘s IPO Home research through October 15. The lucky companies sold shares in January or February. Around the Ides of March, things got ugly with the demise of Bear Stearns – and they haven’t improved.

Not only is the number of IPOs down 77% from a year earlier, the dollar volume is off, too. IPO Home estimates $27.8 billion worth of IPOs have priced so far in 2008, less than half the 2007 total. And close to two-thirds of the $27.8 this year came from one giant offering: Visa, back in March. Only one IPO other than Visa topped a billion dollars, and the median of the 43 offerings listed by IPO Home was $157 million.

There’s always next year. Or, if the last IPO drought is an indication, maybe 2011. Quality deals may still make it, but simplicity and a well-defined risk profile will be cornerstones of IPO stories for awhile.

Weekends have turned into a time when once-proud financial institutions are vaporized. Usually, they don’t go completely to zero, so “vaporized” may be too strong. But they are banished to someplace far from their former glories. They move from Wall Street to Zero Street.

The new residents of Zero Street already are too numerous to name. We don’t know who else may move there, or if any will come back.

For public companies accustomed to enjoying financial support from Wall Street, walking down Zero Street looking for capital won’t be much fun. The credit crisis and bear market are real and dangerous. Wall Street already was changing before 2008, but by the time 2009 arrives, we will be dealing with a dramatically different financial community.

As investor relations professionals, we need to be studying these changes and thinking through implications for our companies. Among the trends we might consider:

… Shrinking sell-side. Already consolidating before the crisis, the future Wall Street will not have nearly the number of I-banks and analysts. Whether the survivors are more powerful or less, we’ll see.

… Bruised buy-side. The universe of investors, institutional and individual, will surely be more cautious, distrustful and risk-averse going forward. At least for awhile.

… Growing government. Washington is becoming an owner and lender to so many big institutions, we can expect a push for massive expansion of regulation in banking and investment relationships.

… Punitive actions. Bear markets always lead to nasty hearings on Capitol Hill, allowing Congress to place blame somewhere else, plus criminal prosecutions for behaviors that might be civil matters in better times. Not that wrongdoers should ever get off, but justice can turn into vengeance.

… Real economic impact. For most of us, the biggest concern is not what the market does near-term, but what the debt and equity crises (and reactions to them) do to our companies’ ability to compete and grow in the future. And we can’t predict that.

I’ve offered some thoughts on potential IR messages and tactics in a bear market (here and here). And I welcome any ideas you might contribute to this conversation.

Over on IR Web Report, a consistently informative source on all things online, Dominic Jones kindly refers readers to this blog (see Oct. 6 post) – and adds his own useful insights. He endorses the value of staying in front of investors but notes that the Web offers new, low-cost ways to do so:

Technologies like blogs, podcasts, vodcasts and Twitter enable everyone from the CEO to workers on the shop floor to tell the company’s story. And often their voices, real and unrefined by the corporate PR machine, have much more credibility than sanitized, over-massaged press releases.

Putting a human face on the corporation, he adds, is critical:

… if you want to give your company an edge in this market, you’d do well to remember that investors are also buying into a business run by real people. Get those people out in front of investors, not just in person in small group meetings or one-on-ones, but out on the web as well.

My thought is that IROs might take advantage of a depressed time (and the CEO/CFO’s reluctance to go on the road and meet depressed investors?) by moving forward with IR 2.0. Dominic’s blog archive is a good place to start researching more interactive forms of communication – and preparing a case for management and legal to embrace the trend toward online IR.

So the bear growls, claws, gnaws and gets most of us down – measured either by our emotional states or the stock prices that stare back at us from our screens. The S&P 500 is down 32% from a year ago. The Wall Street Journal must be running out of synonyms: shock, shake, mess, slide, crisis, meltdown, turmoil, crunch, plunge …

So far we haven’t seen Time or Newsweek cover stories pronouncing the “death of the stock market” – a traditional sign of investor capitulation and a bottom – so it’s a fair bet the negative environment will be with us awhile, despite the occasional bounce. No doubt more bad news awaits.

Accordingly, here are 10 ideas on doing investor relations in a bear market. Nothing unique or magical – a difficult market is by definition, well, difficult – but here are the thoughts of one IR guy who has been through a few market cycles:

… Stay visible (or get out there). Sure, it’s hard to tell a happy story when everyone’s scared to death. But a happy story isn’t the goal. At some point investors, especially professionals who may be keeping their powder dry right now, will be back in the buying mood. They should be getting to know you now.

… Be factual in your tone. The market ascribes credibility to executives who lay out the facts in a pretty blunt way. Presentations and publications should be fact-laden, not flashy, funny or visionary. You’re giving people data to evaluate your company in the midst of a fearful time. Their view of the broader market environment probably will determine when they’re in a buying mood, anyway.

… Don’t be quick to make promises. Suppose the financial turmoil turns into a real recession (as economists, not politicians, define it). Consumer spending could go in the tank and stay there. Business investment may be on hold. Earnings could go worst-case. Guidance based on economic assumptions may go awry – so at least lay out the assumptions for investors, if you’re going to forecast results or major events in the future.

… Do tell the long-term story. In spite of complaining about short-termism in the stock market, many CEOs and CFOs talk to investors as if the latest quarter, or the next, is the biggest deal for shareholders. You should ask, what is the key message? What will drive the value of this company? Odds are, it has to do with business trends that span several years, competitive position, innovative strategy and the like.

… Discuss the balance sheet. When investors are valuing stocks on their growth prospects, it’s about the P&L. But when the issue is survival, people need to understand the size and nature of the assets, and the size and nature of the liabilities. Safety (or lack of it) is found in the balance sheet.

… Give the bad with the good. Nothing erodes the trust of investors as much as management being in denial. Running the “sunshine pump” or trying to gloss over bad results damages a company’s credibility. Acknowledging problems and defining a plan of action builds confidence.

… Refute rumors quickly with the facts. As several of the Wall Street collapses have shown, rumors can aggravate business problems by undercutting the confidence of customers and investors. More than ever, a bear market is a time to monitor online and market “chatter” – and correct anything erroneous.

… Coordinate investor and media relations. It’s a small world. When a reporter is working on a story, he’ll call analysts and investors (friendly or unfriendly) looking for insight. And investors, in turn, pay attention to what the media says about a company. Companies should speak with one voice, and IR and PR should coordinate daily to plan responses on any issues lurking in the market.

… Polish up your Q&A. The issues are myriad: credit crunch, recession, your industry trend, consumer pullbacks, job cuts, commodity prices, political uncertainty, regulatory changes in the air. Best practices for IR include preparing a document with answers to the market’s most likely questions and concerns, running them through senior management and legal counsel, and distributing these messages to everyone in-house who answers questions from investors and the media.

… The story is the business, not the stock price. For anxious shareholders, the most urgent issue right now may be the amount of money they’re down on their investment. But for the company and more seasoned investors, the question is where the business stands today – and what management is doing for the future. Regardless of the drama in the stock market, for IROs the business is the message.

Some of the most meaningful forward-looking information a company can provide is insight into a new product and its expected economic value. Those new products drive our future growth, so their market profile and prospects are a key message for shareholders.

This is one of the critical challenges for biotech executives – to see beyond their own natural enthusiasm for an emerging treatment possibility and the positive support of consulting medical thought leaders – who may be somewhat removed from the actual practice in market conditions.

The PhDs are talking about biotech companies in this case, but the same principle applies to technology and consumer products. While a company’s consultants naturally tend to buy in to the excitement of a new product, the real decision makers out in the marketplace can be very skeptical. Uptake of a new product can take years. Market penetration can top out at 2% rather than 20%. The authors cite evidence of widespread physician reluctance to new drugs and call on biotech executives to do real market research, critically evaluate and realistically profile the prospects.

Management, of course, should possess the very best information on the characteristics of a product and the market it will serve. Investor relations professionals would serve their managements well to ask tough questions and press for rigorous, in-depth, reality-based information on the market potential and risks of new products. The tough questions investors ask.

And that will enable IROs to provide shareholders with the most accurate, complete information possible on the prospects of new products – and enable investors to size up their economic value.